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Dampening General Equilibrium: From Micro Elasticities to Macro Effects

Author

Listed:
  • Chen Lian

    (MIT)

  • George-Marios Angeletos

    (M.I.T.)

Abstract

General equilibrium (GE) effects are key to macroeconomics: they turn partial-equilibrium intuitions on their head; they also limit the use- fulness of identifying local responses to local shocks as a method of es- timating the macroeconomic effects of aggregate shocks. In this paper, we argue that GE effects are weak in the short run. In particular, we establish an equivalence between (i) the Tâtonnement process of a stan- dard macroeconomic model and (ii) the equilibrium dynamics of a variant model that removes common knowledge of aggregate economic conditions. This offers a formalization of the notion that GE adjustments take time; it provides a justification for extrapolating from the aforementioned kind of micro elasticities to macro effects; and it upsets conventional policy recommendations.

Suggested Citation

  • Chen Lian & George-Marios Angeletos, 2016. "Dampening General Equilibrium: From Micro Elasticities to Macro Effects," 2016 Meeting Papers 1456, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1456
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    Cited by:

    1. George-Marios Angeletos & Chen Lian, 2018. "Forward Guidance without Common Knowledge," American Economic Review, American Economic Association, vol. 108(9), pages 2477-2512, September.
    2. Yongok Choi & Giacomo Rondina & Todd B. Walker, 2023. "Information Aggregation Bias and Samuelson's Dictum," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1119-1145, August.
    3. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.

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